Does it make sense to transfer RRSP funds to my TFSA?

I am very interested in your answer relating to transferring some of my current RRSP/RRIF assets to new TFSA accounts.

Here is my current situation:

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My RRIF account had $510,000 to $535,000 depending on the stock market. I am 73 years old and in good health. My wife has an RRSP worth $175,000 to $225,000 depending on the stock market. She will convert to a RRIF by the end of 2014 because she is presently 69. We have a household income from our fixed pension of $40,000.

Does it make any sense to build up a TFSA (empty now) from RRIF/RRSP proceeds?

Best regards, Henry

Dear Henry,

The answer is dependent on a few things. What is your total individual income for each? How much can you de-register to stay within the same tax bracket? Are you okay with paying the tax on the added income?

The initial amount would be $20,000 for 2012 or $25,000 in 2013 in order to catch up to the allowable amount. You could de-register $10,000 this year and $15,000 the next, or any combination of that amount, to reach the $25,000 for 2013. Note: There would be a withholding tax when you request the withdrawal.

The other factor is how would you invest the $25,000 for each? If you continued to keep the same dollars in the RRSP/RRIF accounts, the funds are 100 per cent taxable as income when withdrawn. For the TFSA, the future income can be withdrawn tax free and would not affect any government income programs.

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The key is to know that the contributed dollars to the TFSA are after-tax dollars.

If you have no other funds outside of the RRSP/RRIF, then you are essentially moving assets from one tax shelter to another. The amount is reduced by the taxation of the de-registered money.

If you are aware that your total portfolio would decrease by the amount of the tax, and you believe over the long term you can recoup that difference, it may make sense to de-register some or all of the amount you can contribute to the TFSA.

Nancy

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Nancy Woods, CIM, FCSI is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. To register your interest for an upcoming seminar, "What are the Questions Your Advisor is NOT Asking You?" visit her website nancywoods.com. To ask her a question, send an e-mail to asknancy@rbc.com.

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